11 April 2022 – Susannah Streeter, senior investment and markets analyst, Hargreaves Lansdown:
‘’The UK economy is already showing signs of fresh fragility in its latest health check, which is far from surprising given that in February the world veered from one crisis to another. It eeked out just 0.1% growth during the month, and that was despite a leap in demand for travel, with increases in tour operator travel agency and other related activities surging by a third (33.1%) on the month. Hospitality continued to bounce back from the unwelcome side effects of the Omicron variant, with accommodation and food services boosted by 8.6% but production fell by 0.6% and construction dipped by 0.1%.
It’s little wonder the economy overall is showing signs of stalling from its remarkable pandemic recovery, given the sense of foreboding which arose from mid-February as troops amassed on the Ukraine border and then the commodity shock unleashed by the invasion hit sentiment.
Although the economy is 1.5% above its pre-pandemic level, the underlying health may be weaker particularly because increased healthcare activity has been the crutch supporting the economy during the pandemic. The main contributor to the recovery from the start of the crisis has been human health and social work activities and the reduction of the test and trace scheme and vaccination programme partly accounted for the slowdown in February. We still need to see a shift upwards in overall productivity levels but with the labour crunch intensifying, borrowing costs rising and business investment flagging that is proving elusive.
Despite worries about consumer and company resilience this snapshot is unlikely to push the Bank of England off its path of rate hikes this year. Attempting to tame increasingly wild inflation is still set to be the priority. However, this reading does indicate the UK economy is showing more signs of fragility than the US. The saving grace for now are the piles of lockdown savings which many consumers were able to build up during the pandemic and which are now a soft pillow to land on as the headwinds of higher prices whip up, but this cushion flatten as the year progresses. So policymakers are likely to hold off from mirroring the Federal Reserve’s much more aggressive stance in terms of tightening monetary policy.
The outcome of the first round of the French Presidential elections may have seen Emmanuel Macron emerge in front, but sighs of relief could be short lived and investors are set to stay highly wary about the outcome. By softening her hard line image Marine Le Pen of the far right Front National has victory within her grasp, and in the run off in less than two weeks, her promises of slashing fuel duty and scrapping income tax for the under 30s will prove alluring for millions of voters facing the intense cost of living squeeze. But a vote for Le Pen risks isolating France from the beating heart of the European bloc, with her promises to cut EU budget contributions and renegotiate treaties. Her pledge to ban Muslim headscarves in public places and plans for a referendum on immigration would veer the country into more intolerant territory, and along with protectionist proclamations, a Le Pen victory would knock investor sentiment in France. The euro has increased very marginally against the dollar, but remains under pressure hovering around $1.08 levels not seen since May 2020. French bond yields are elevated, at 1.257%, the highest level since 2015. It’s an indication that the risks of owning French government debt are now perceived to be much higher, given that Le Pen still has a good chance of seizing the keys to the Élysée Palace. Her victory could raise the stakes on a wider geopolitical level, as she has questioned the terms of France’s NATO membership at a time when the organisation is focused on increasing contributions from member nations to bolster its response to Russian aggression.
The oil price has dipped back a little, with Brent crude falling 2% to around $100 a barrel, as Moscow regroups its forces, and ongoing lockdowns in the sprawling technological and manufacturing hub of Shanghai continue. Traders are also assessing the impact on global supply of the emergency release of 60 million barrels from strategic reserves by big oil consuming nations, in addition to the 180 million set to be drip fed into use by the US. But fears are mounting that Russian aggression will soon be significantly stepped up in Eastern Ukraine, where cities are bracing for fresh sustained assaults. So the oil price is set to stay volatile as it’s still unclear if the emergency release of strategic reserves will offset the lack of Russian crude, particularly if the sanctions screw is turned even tighter.
Twitter is again lighting up with the latest twist in the Elon Musk saga, after he turned down a board seat at the company. His ambitions to shake up the social network though seem undimmed, having rattled off a string of consciousness tweets over the weekend about how the social network could be changed. His thinly veiled criticism about how the company is run by suggesting HQ should be transformed into a homeless shelter given that nobody turns up, isn’t likely to have gone down well among staff, many of whom have embraced the remote working offer. There is likely to have been a considerable amount of soul searching within the company about how Mr Musk’s highly maverick nature would have suited a board role, so the offer had already raised eyebrows. It’s clear Mr Musk wants to retain the full freedom to criticise company policy, to steer it in his desired direction of travel and he still has a ringside seat, remaining the biggest shareholder and also has the power of his 81 million twitter followers to do just that.’’
